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Select Committee contingent charging Inquiry launch

9 January 2019

The Work and Pensions Select Committee has launched an Inquiry into contingent charging in relation to DB pension transfers, with a recommendation it should be banned. This has drawn backers and the who urge caution in respect of a ban.

This is where the adviser is only paid, or paid much more, if the pension holder decides to take a DB pensions transfer. This the Committee said had led to “bad advice” where the pension holder took a DB transfer “when it was not in their best interests”.

The call for fresh inquiry follows the committee’s previous inquiry into pension freedom and choice, during which, it says, it received worrying evidence about the financial advice given to members of the British Steel Defined Benefit Pension Scheme (BSPS).

The Committee pointed out that the problem was not unique to BSPS members and could apply to anyone who is eligible for a DB transfer: “over 100,000 people a year are taking a DB transfer on the back of potentially bad advice.”

The Committee has recommended that this charging structure should be banned for defined benefit pension transfer advice.

In response to the Committee’s report, the FCA agreed to look at the issue and included it in a consultation, the feedback from which were published, together with its final rules and guidance in October 2018.

It summarised the pros and cons of a ban and said responses to the consultation highlighted the “complexities and interlinked issues that need to be worked through and considered”.

As a result, the FCA did not introduce a ban on contingent charging and said it needed to carry out “further analysis of the issues”. In particular, it said, there was a lack of evidence linking contingent charging to unsuitable advice and bad outcomes.

Hence, the Committee has launched a new Inqury in which it wants to hear from anyone who has been affected by or has a view on this issue.

It is asking three specific questions:

• Does contingent charging increase the likelihood of unsuitable advice?

• What would be the impact of a ban on contingent charging on consumers and firms and how could any negative effects be minimised?

• Are there any alternative solutions that would remove conflicts of interest but avoid any possible negative impacts of an outright ban on contingent charging?

Rt Hon Frank Field MP, Chair of the Committee, said: “The FCA has confirmed to me that it shares many of the Committee’s concerns about the scourge of contingent charging. But to tackle this, and to protect consumers from the vultures circling around their pension pots, it needs more proof of what is really happening to people. It has explained to me the complexities of contingent charging, and how it needs to carefully consider its possible interventions so as not to cause unintended harm, particularly to vulnerable customers. The FCA has said it would welcome the Committee’s help to find out more, and we’ll be happy to do everything we can to make sure we get the right safeguards in place.”

Industry responses

National advisory firm LEBC welcomed the news of the Inquiry and the practice of contingency charging “is not in the best interest of the consumer and should be banned”.

Explaining the firm’s thoughts, LEBC Director of Public Policy, Kay Ingram said: “Contingent charging creates a doubt that the advice being given can be unbiased. It also perpetuates the cross subsidy between consumers and trivialises what is a key decision for the pension scheme member to make.

“Advice to retain occupational pension benefits, with all the guarantees they offer, is valuable and should be paid for. Charging clients only where the recommendation is to transfer, means that they inevitably have to pay more to subsidise those who are told not to transfer – yet both outcomes require the same input from the advice firm.

“The ‘no transfer no fee’ model should be consigned to history so that all consumers can be assured of impartial unbiased advice at a fair price. This would enable firms to cut the cost of advice for everyone and make advice more accessible.”

Steven Cameron, pensions director at Aegon, urged the Committee to “keep an open mind” in its Inquiry.

He said: “Contingent charging can create conflicts of interest, but an outright ban should be a last resort option as it will exacerbate the advice gap. Regulatory policy shouldn’t be based on stamping out isolated instances of bad practice, particularly if this could constrain how the vast majority of professional advisers serve their clients.

“The first step should be to explore if the specific conflicts around DB transfer advice can be managed effectively. The heightened profile of DB transfer advice suitability should in itself reduce the likelihood of ‘bias’ towards advising to transfer. Furthermore, compliance departments and checks undertaken by pension transfer specialist provide further safety measures.

“Advisers and their clients should have a range of means of paying for advice, provided these do not present unmanaged risks of unsuitable advice. Some individuals prefer to pay for advice on a contingent basis rather than ‘upfront’ and it would be unfortunate if this group found themselves barred from considering transferring.”

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